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Published: October 27, 2009
 / Winter 2009 / Issue 57

 
 

Profits Down, Spending Steady: The Global Innovation 1000

To that end, during the recession, Harman — whose branded car audio and premium infotainment systems have been designed primarily for the high-end auto market — turned to its Chinese and Indian R&D teams to help build a new, “clean sheet” mid-priced infotainment system. It was developed independently of any auto manufacturer, in record time, at substantially lower cost. The system can be incorporated into a new vehicle within a year, compared to the two to three years the process usually takes, speeding time-to-market and saving considerable expense. Lardon believes the new system will position his company particularly well to profit from the recovery in the auto industry, especially in Asia, whose auto markets have strong growth prospects.

The General Motors Corporation, despite all its struggles in the past year, is also looking to the future. As it came out of bankruptcy in the summer of 2009, the company had to significantly cut back on R&D, in part because it so radically slimmed down its brand lineup. Still, says Alan Taub, who as GM’s vice president of global research and development has responsibility for the company’s advanced research, “doing so gave us the opportunity to clean up our priorities. We’ve done that, and now we’re back to executing.” What Taub’s group is executing on, however, has changed as well. As GM looks to shift its cultural focus from products to consumers, Taub’s team is at the center of the cultural shift, working not just on the total vehicle experience, but also on how better to understand what GM’s customers want.

The ROI of Innovation
Despite the opportunities the downturn has opened up for stronger players, nearly every company has been affected by the slowdown in some way. Even those companies that have not cut innovation spending dramatically are trimming here and there, tightening management processes and reassessing their product development portfolios. More than 40 percent of the respondents to our survey said they have become more conservative in their approach to innovation, and 70 percent reported that they were adjusting their strategy to better capture changing customer requirements.

The goal for nearly all the R&D executives we spoke with is to improve the returns on their innovation investments, in both the short term and the long. More than 40 percent of survey respondents said their companies were focusing on process improvements to change R&D spend during the downturn, and a similar number reported that they were getting better at killing bad projects. More than a third of companies surveyed, for instance, said they were terminating more exploratory projects that lacked specific timelines, and more than 40 percent said their companies were focusing more on newer products that have the potential to grow faster. “For the past two or three years, we have been looking at our R&D portfolio, focusing on fewer, bigger ideas as opposed to lots of incremental little things,” says Kraft Foods’ Alan Grant. “What the recession has done is change the filters through which we view the portfolio. Which of these products might we bring to the front and which might we choose to backpedal on, given the challenging economic times?”

Or consider the case of Applied Materials, which faces an unusually difficult innovation environment. Thanks to the recession, quarterly revenues for all the top manufacturers of wafer equipment dropped by nearly 80 percent from their peak quarter in 2007 to their bottom quarter in 2009. As a result, nearly every company’s R&D spending has rapidly outpaced revenues, and now companies must either bring that R&D spending down dramatically or grow revenue quickly. Meanwhile, the pressure to innovate in the chip business keeps increasing as the size of semiconductors becomes ever smaller, and Applied Materials’ silicon group finds itself having to spend more and more money on R&D to get the same results.

 
 
 
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Resources

  1. Barry Jaruzelski and Richard Holman, “Innovating through the Downturn: A Memo to the Chief Innovation Officer,” (PDF) Booz & Company white paper, March 2009: How companies can tailor their product and technology initiatives to new market realities and refocus their investments on their core R&D and innovation capabilities.
  2. Barry Jaruzelski and Kevin Dehoff, “Beyond Borders: The Global Innovation 1000,” s+b, Winter 2008: Last year’s study revealed, for the first time, how R&D money is benefiting most parts of the world.
  3. Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” s+b, Winter 2007: This study, identifying two primary success factors in innovation strategy: aligning the innovation model to corporate strategy and listening to customers every step of the way.
  4. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Smart Spenders: The Global Innovation 1000,” s+b, Winter 2006: This study, uncovering a small group of high-leverage innovators who outperform their industries.
  5. Zia Kahn and Jon Katzenbach, “Are You Killing Enough Ideas?s+b, Autumn 2009: How companies can improve their innovation performance by getting their formal and informal organizations in sync.
  6. Alex Kandybin, “Which Innovation Efforts Will Pay,” MIT Sloan Management Review, September 25, 2009: How companies can use an incisive analytic tool to gauge their overall R&D effectiveness.
  7. Paolo Pigorini, Vinay Couto, Ariel Fleichman, and Carlos Gondim, “Reshaping Your Company Business Model: Building for the Future During the Downturn,” (PDF) Booz & Company white paper, June 2009: How to best implement long-lasting and effective initiatives aimed at fundamentally improving the way companies operate.
  8. C.K. Prahalad, “The Innovation Sandbox,” s+b, Autumn 2006: To create an impossibly low-cost, high-quality new business model, start by cultivating constraints.
  9. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/innovation.
 
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